Puerto Rico And Its Underwriters Appear To Be In Noncompliance With SEC Rule 15c2-12

Puerto Rico’s underwriters intend to sell $2-3 billion in new securities to the public--including retail--despite the fact that it is chronically noncompliant with SEC Rule 15c2-12, which requires timely financial reporting.

Here is what the SEC says:

“An underwriter shall not purchase or sell municipal securities in connection with an offering unless the underwriter has reasonably determined that an issuer of municipal securities has undertaken in a written agreement to provide annual financial information.”

Here is what Puerto Rico says:

“In light of the Commonwealth’s continuing difficulties in the timely filing of the Comprehensive Annual Financial Report notwithstanding the establishment of the policies and procedures described above, the Commonwealth is reviewing how to improve such policies and procedures to ensure timely compliance in the future with its continuing disclosure obligations.”

Here is Puerto Rico’s explanation of its noncompliance with SEC Rule 15c2-12:

The Comprehensive Annual Financial Report for fiscal year 2012 was filed by the Commonwealth on September 16, 2013, which is after the Commonwealth’s May 1 deadline, established in its continuing disclosure undertakings pursuant to SEC Rule 15c2-12. The Commonwealth was unable to finalize its audited financial statements on time due to (i) delays in the audit of such financial statements as a result of the government transition process, (ii) the adoption of new government accounting pronouncements, (iii) the restatement of the financial statements of the PRPA, a discretely presented component unit of the Commonwealth, and (iv) the failure of the University of Puerto Rico, a discretely presented component unit of the Commonwealth, to finalize its audited financial statements. The Commonwealth is evaluating the implementation of measures to ensure future timely filings of its audited financial statements. The Commonwealth has entered into several continuing disclosure undertakings in accordance with SEC Rule 15c2-12 in connection with its bond issuances. Although the Commonwealth has filed all the reports and financial statements required to be filed, some of these filings have been made after the Commonwealth’s filing deadline, which is normally May 1.

Puerto Rico has acknowledged that its financial reporting is noncompliant with SEC Rule 15c2-12. One might think that this would preclude the marketing of $2-3 billion in new debt securities. The underwriters for PR’s upcoming bond sale are Barclays, RBC and Morgan Stanley. It is not entirely without interest that Barclays is also a major creditor of PR. Would that not be a small conflict of interest? Wasn’t that the whole point of Glass-Steagall, to prevent banks from unloading their bad loans on retail investors?  

How can an underwriter sell bonds of an issuer whose financial disclosure  is 18 months old? How can a fiduciary buy the bonds of an issuer with no current financials?

It is amazing to me, a person who has been a market participant since 1978, that nothing ever changes, and that the Madoffs and the Enrons are as much in business today as they were in 1978. I am not advocating another Dodd-Frank; I am advocating the enforcement of existing law, and that the SEC should protect retail from buying dreck, which was the whole point of the Securities Act of 1934.